Best stock to invest in – US Geothermal: Can A Reverse Split Heat Up This Stock?

Best stock to invest in

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by Debra Fiakas CFA

US Geothermal (HTM:
NYSE) has been on our radar for some time. Despite
considerable accomplishment in terms of building electricity output
from a portfolio of geothermal power installations, investors seem
reluctant to embrace the company and its stock. Earlier this
week, US Geothermal management issued its usual quarterly update on
its development work, this time detailing progress in expanding
capacity and improving well performance on three of its geothermal
installations. Altogether an incremental 90 megawatts are
under development, which would triple the current power generation
capacity of 45 megawatts. The company press release was met by
investors with a yawn. Perhaps most are waiting for the
earnings press release scheduled for November 10th.

The consensus estimate is for a penny in net profits per share on
$7.2 million in total sales for the quarter ending September
2016. Compared to the same quarter last year, that prediction
represents flat earnings on slightly higher revenue. US
Geothermal appears to have done a good job of conditioning its
analyst following to the current potential in sales and
earnings. At any rate, the company mostly meets the consensus
expectation and rarely exceeds the earnings per share hurdle by more
than a penny.

If investors are not willing to bid the stock above the $1.00
price level, the company is going to force the stock to whole
dollars. The day before the earnings announcement a 1-for-6
reverse split will be executed, leaving the stock price quoted at
about $3.90 per share and the shares outstanding near 18.9 million
shares.

Whether HTM remains at current levels is another matter. The
stock is valued at 22 times earnings expectations for
2017. That might seem a bit expensive to some investors
who are not impressed by pennies in earnings per share. For
those who have the patience to wait for the company to build out its
power generation portfolio, the current stock price could be
considered a bargain. US Geothermal has assets that, if
developed, management claims could triple current output.
Granted there will be capital investment requirements to reach this
goal. Debt outstanding is currently $110.6 million and the
debt-to-equity ratio is currently 85:1. Yet the company
has hardly reached its limits in terms of raising either debt or
equity capital. Current cash balances of $18.3 million imply
net debt of $92.3 million, and there is more cash where that came
from. In the twelve months ending June 2016, the
company converted 41% of its revenue to operating cash flow, a
performance metric that should cheer both creditors and equity
investors.

Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.